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Highlights:
- Jefferies Downgrades Apple: Jefferies cuts Apple’s rating to 'hold' and reduces its price target to $212.92 due to concerns over unrealistic iPhone 16 and 17 expectations.
- AI Technology Still Years Away: True AI-enabled smartphones are not expected until 2026 or 2027, limiting growth in the near term.
- High Valuation Risk: Apple’s reliance on iPhone sales, combined with its near-record stock valuation, led Jefferies to adopt a more cautious outlook.
Apple Inc (NASDAQ:AAPL) faced a significant downgrade from Jefferies, as the investment bank cut its rating from 'buy' to 'hold' and reduced its price target to $212.92. The downgrade comes as Jefferies raised concerns over inflated expectations surrounding Apple’s upcoming iPhone 16 and iPhone 17 releases, alongside a stock valuation that is nearing record highs.
Unrealistic iPhone Expectations
According to Jefferies, excitement around the iPhone 16 and 17 is premature, particularly when it comes to their potential AI capabilities. While Apple has made strides in integrating artificial intelligence (AI) into its devices, Jefferies highlighted that the hardware necessary to fully support sophisticated AI functions is still years away. The bank does not expect to see smartphones with true AI functionality until 2026 or 2027, as the technology for specialised memory and high-speed connections that enable these capabilities is still under development.
Jefferies forecasts only modest unit growth for the iPhone 16, which could underperform the high expectations set by the market. With Apple still heavily reliant on iPhone sales, which contributed 52% of the company’s revenue in 2023, Jefferies sees this as a significant risk to its stock performance in the near term.
Stock Valuation and Long-Term AI Potential
Jefferies acknowledged Apple’s long-term potential in AI, especially its ability to create integrated hardware and software solutions. However, the firm believes that the current stock valuation is too high given the absence of near-term catalysts and the limited impact of AI on the iPhone product line in the next few years. Apple's price-to-earnings ratio for fiscal year 2024 is nearing historical highs, which raises concerns for analysts about its ability to maintain such high valuations without significant growth or product innovations in the short term.
Apple’s Heavy Reliance on iPhone Sales
Despite Apple’s efforts to diversify its revenue streams, the iPhone remains its dominant product, driving sales for other items like AirPods and iPads, and bolstering service revenue. Jefferies anticipates this reliance will persist, which adds risk, especially if new iPhone models fail to meet market expectations. The lack of breakthrough technology in the near term, combined with the stock's elevated valuation, led Jefferies to adopt a more cautious outlook.
Apple shares dipped by 1% to $224.65 ahead of the market bell following the downgrade.
